Our previous article covered the tax treatment of rental income for foreign property owners in Japan — in other words, the tax you pay when you "lease" a property. This article focuses on the tax implications of selling a property that you had been renting out.
We'll walk through the capital gains formula, how to allocate the purchase price between land and building, how the sale is taxed, the withholding rules that apply specifically to non-residents, and the documents you'll need when filing your tax return.
1. The Capital Gains Formula
The amount of capital gain on a real estate sale in Japan is calculated as follows:
Capital gain = Sale proceeds − (Acquisition cost + Selling expenses)
Here's what each term means:
- Sale proceeds: The total sale price (this also includes any fixed asset tax proration payment you received from the buyer — more on this below).
- Acquisition cost: The acquisition value of the land, plus the undepreciated book value of the building.
- Selling expenses: Real estate agent commissions, stamp duty, mortgage discharge fees, and other costs directly incurred to make the sale.
Once you've calculated the capital gain using this formula, you multiply it by the short-term or long-term tax rate (discussed below) to arrive at the tax due — 39.63% or 20.315% for residents, and 30.63% or 15.315% for non-residents (who are exempt from the inhabitant tax portion).
One item in the "acquisition cost" deserves special attention: the undepreciated book value of the building. The acquisition cost of the building isn't simply the price you originally paid for it — it's that price minus the depreciation that has accumulated over your period of ownership. In other words, the capital gain depends heavily on how you allocated the original purchase price between land and building. You can usually find this undepreciated value in the depreciation section of the income tax return you file for your rental income. Given how much this figure affects your final tax bill, let's look at how that original allocation should be determined.
2. Allocating the Purchase Price Between Land and Building
Our previous article on rental income didn't go into detail on this allocation. But it matters both during the rental period and when you eventually sell the property: it determines your annual depreciation expense while you're renting the property out, and — as we just saw — it determines your acquisition cost when you sell.
Consumption tax doesn't apply to the sale of land, but it does apply to the sale of a building. So if your purchase contract shows the consumption tax amount separately, the standard approach is to work backward from that figure to determine the building's acquisition value.
For example, if the contract states "consumption tax on the building: ¥2.2 million," the building's pre-tax price would be ¥2.2 million ÷ 10% = ¥22 million, and that ¥22 million (plus the ¥2.2 million in tax) forms the basis of the building's acquisition value. The land value is then simply the total purchase price minus the building value (tax included).
If the contract doesn't separately state the land and building prices, or doesn't show a consumption tax amount, the standard fallback is to allocate based on the ratio of the properties' fixed asset tax assessed values. This is the most commonly used method in practice, since the assessed values are easy for anyone to obtain and provide a reasonably reliable basis for the split.
It's worth checking that these two approaches — working backward from the consumption tax amount, and allocating by fixed asset tax assessed value — produce reasonably similar building values. If they're close, that supports the reasonableness of your allocation. If they diverge significantly, you run a higher risk of the tax office challenging your allocation method.
In fact, there is a recent decision of Japan's National Tax Tribunal (dated November 14, 2024) in which an allocation stated in a purchase contract was found unreasonable because it diverged significantly from an allocation based on fixed asset tax assessed values. As a result, the taxpayer's depreciation expense and consumption tax calculations were both corrected.
Practical takeaways
- If the contract states a consumption tax amount, use it as your starting point to work out the building's acquisition value.
- Also calculate the allocation based on fixed asset tax assessed values, and check that the two are reasonably close.
- If there's a significant gap, keep documentation to support your allocation (such as a professional appraisal), or consider using the fixed asset tax assessed value method instead.
3. Capital Gains Are Taxed Separately From Other Income
Salary income and rental income are taxed together with your other income under Japan's progressive income tax system. Capital gains from selling land or a building, however, are taxed separately from your other income, under a system known as separate taxation (bunri kazei, 分離課税).
This means that a high salary or rental income in the year of sale won't push up the tax rate applied to your capital gain. Conversely, if you make a loss on the sale, that loss generally cannot be offset against your salary or other income.
4. Short-Term vs. Long-Term Gains — The Cutoff Is January 1 of the Year You Sell
The tax rate on your capital gain depends heavily on how long you owned the property.
- Short-term capital gain: Ownership period of 5 years or less → combined rate of 39.63% (30% income tax + 0.63% reconstruction surtax + 9% inhabitant tax)
- Long-term capital gain: Ownership period of more than 5 years → combined rate of 20.315% (15% income tax + 0.315% reconstruction surtax + 5% inhabitant tax)
The key point to watch is exactly how the 5-year threshold is measured. It's not a simple count of days between your purchase date and your sale date. Instead, the determination is based on whether your ownership period exceeds 5 years as of January 1 of the year in which you sell.
In practical terms, if your ownership period is close to the 5-year mark, shifting the sale by just a few months — enough to cross from short-term into long-term treatment — can cut the applicable tax rate nearly in half. Before selling, always check, based on your original acquisition date, whether your ownership period will exceed 5 years as of January 1 of the year you plan to sell in.
As for the inhabitant tax component, non-residents are generally exempt from it (inhabitant tax is levied on those who have an address in Japan as of January 1 of the year following the year of the sale). So for a non-resident seller, only the income tax and reconstruction surtax portions apply in practice — 30.63% for short-term gains, or 15.315% for long-term gains.
5. Non-Residents: 10.21% Withholding on the Sale
When a non-resident sells land or a building located in Japan, the buyer is, in principle, required to withhold 10.21% of the sale price (10% income tax + 0.21% reconstruction surtax) and pay it to the tax office. In other words, the amount you actually receive at settlement is 89.79% of the agreed sale price.
There is an important exception: if the buyer is an individual purchasing the property for use as their own or a family member's residence, and the sale price is ¥100 million or less, the buyer is not required to withhold anything. In that case, you receive the full sale price without any withholding.
Where withholding does apply, filing a Japanese tax return will get you a partial refund of the amount withheld.
Why does filing a tax return get you a refund?
The 10.21% withheld at settlement is a flat amount applied to the entire sale price. Your actual tax liability, on the other hand, is calculated by applying the relevant tax rate to your capital gain — the sale proceeds minus your acquisition cost and selling expenses — which is normally a smaller figure than the sale price itself. That difference is what gets refunded when you file. Here's a worked example.
- Sale price: ¥80 million
- Acquisition cost: ¥34 million
- Selling expenses: ¥2.5 million
Capital gain = ¥80 million − (¥34 million + ¥2.5 million) = ¥43.5 million
Assuming this qualifies as a long-term gain, the non-resident tax rate is 15.315% (with no inhabitant tax), so:
Tax due = ¥43.5 million × 15.315% ≈ ¥6.66 million
Meanwhile, the amount withheld by the buyer at settlement was:
Withholding = ¥80 million × 10.21% ≈ ¥8.17 million
Filing a tax return would therefore result in a refund of the roughly ¥1.51 million difference (¥8.17 million − ¥6.66 million).
6. Documents You'll Need for Your Tax Return
When filing a capital gains tax return, you'll need to keep records from both when you purchased the property and when you sold it. The following documents are typically required.
At the time of purchase
- The purchase agreement
- Receipt for the real estate agent's commission
- Receipts for judicial scrivener fees, registration and license tax, and real estate acquisition tax paid at the time of purchase
- The fixed asset tax assessment certificate obtained at the time of purchase
- Statement showing the fixed asset tax / city planning tax proration amount
At the time of sale
- The sale agreement
- Receipt for the real estate agent's commission
- Receipts for stamp duty, mortgage discharge fees, and other selling expenses
- Statement showing the fixed asset tax / city planning tax proration amount
Fixed asset tax and city planning tax are levied on whoever owns the property as of January 1 of that year. That means even if you sell partway through the year, the legal obligation to pay the full year's tax remains with the seller. In practice, buyers and sellers commonly prorate this amount based on the handover date, but for tax purposes this proration payment is simply treated as part of the sale price. That means an amount you paid at the time of purchase should be added to your acquisition cost, and an amount you received at the time of sale should be added to your sale proceeds, when calculating your capital gain.
Something non-residents in particular need to obtain
If you're a non-resident and the buyer withheld 10.21% at settlement, make sure to obtain a Statement of Payment and Withholding Tax (支払調書) confirming the amount withheld from the buyer (or the real estate agent handling the transaction). This document serves as your supporting evidence when calculating your tax liability and claiming a refund of the withheld amount on your tax return. In practice, we sometimes see cases where the buyer failed to withhold correctly, or where this document simply doesn't get passed along — so it's worth confirming at the time of settlement.
Summary
If you're a foreign owner selling real estate in Japan, keep the following in mind:
- Confirm the land/building allocation carefully at the time of purchase, and keep supporting documentation.
- Since the tax rate changes significantly depending on your ownership period, be mindful of the 5-year threshold (measured as of January 1 of the year you sell) when timing your sale.
- If you're a non-resident, budget for roughly 10% to be withheld from your sale proceeds at settlement.
- As a non-resident, make sure to obtain the Statement of Payment and Withholding Tax needed to claim a refund of any tax withheld.
- Keep all purchase- and sale-related documents from the time you buy the property through to the time you sell it.
Selling real estate isn't something most people do more than a few times in their life. Between calculating your acquisition cost, determining your ownership period, and — for non-residents — navigating the withholding rules, it's easy to get the tax treatment wrong in a way that has a significant impact on your final tax bill. If you're considering a sale, we recommend confirming the tax implications before you sign the contract.
If you're a foreign national who owns property in Japan and are considering selling, please get in touch for a free initial consultation. We can support you end-to-end, from the purchase price allocation through to filing your final tax return.